How to: Tomy Real Steam Loco Repair

1) Exactly. Distilled water is specifically treated to make it devoid of impurities like tap water tends to contain, and as such should not leave dissolved materials.
2/4) It uses a small electronic component that converts energy to heat, a.k.a Joule heating. When the engine is supposed to "puff", the heating element receives a pulse to quickly vaporise the water. That's why the Steam Along Thomas (the first version) uses three batteries (4.5V) in the powered Annie. Same with the two D51s and the TrackMaster 2 Real Steam Thomas/James/Percy.
5) The second version was redesigned to be detachable while still not self powered. Moving the batteries into the loco meant there was no room for a reservoir underneath like the first version has. Strange seeing as Mattel worked out how to do it while making their versions all self contained, albeit without sound.